Glasenberg’s Iron Barbs Blunted by Coal Expansion: Commodities

Oct. 24 (Bloomberg) — Ivan Glasenberg, the billionaire chief executive officer of Glencore Plc, has argued his two biggest rivals have got it wrong by feeding a global glut of iron ore.

The world’s largest producers, including BHP Billiton Ltd. and Rio Tinto Group, are fueling a 25 percent increase in output, and “that’s what’s killing the super cycle,” Glasenberg said two months ago in London.

That criticism is cold comfort for coal producers suffering as Glencore, the biggest exporter of the power-station fuel, raises output even as prices dipped to the lowest in five years last week.

“There’s certainly a tension there and that certainly provides ammunition for those that would say ‘look this is simply talk, not walk,’ ” Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London, said by phone.

Glencore’s coal output increased 5 percent in the first half from a year ago and production this year will be 14 percent higher than 2012, according to a Sept. 29 presentation by the Baar, Switzerland-based company to analysts.

While BHP and Rio have defended plans to expand mines, ports and railways in Australia, Glasenberg believes the strategy is flawed as it deepens a price slump and erodes profit margins. His $160 billion offer to combine with Rio was rejected two months ago.

Impact on Prices

Last year, Glasenberg said rival mining chiefs had “screwed up” by swamping the world with raw materials that had eroded prices and profits. Speaking in London on the day BHP announced a $2 billion investment to boost Australian iron-ore output, the 30-year veteran of the commodities trade voiced concern over the plan.

This month he reiterated that view.

“If you look at the statement put out today by BHP Billiton, one of the world’s biggest iron-ore producers, saying they are going to expand production — it has already had an impact on prices,” Glasenberg said Oct. 6 at a conference in London, according to the Wall Street Journal.

Glencore said it’s seeking to bring “discipline” to its coal operations, in an e-mailed response to questions.

“We have consistently told the market that part of the problem with oversupply in coal has been due to legacy capex commitments that we inherited with the takeover of Xstrata, which we could not cancel. Part of the logic of our acquisition of Xstrata was to reintroduce capital discipline,” Glencore said.

Iron ore has slumped 40 percent this year. Rio said Oct. 15 its project to expand annual iron ore production capacity in Australia by 24 percent to 360 million tons is “poised to generate significant value for shareholders.”

Lowest Cost

BHP has a similar goal, according to marketing head, Arnoud Balhuizen, who said on Oct. 22 that it’s still “extremely value-creative” to invest in iron ore.

“I’ll leave you to draw your own conclusions,” BHP CEO Andrew Mackenzie said in London in response to a question whether Glencore’s view on iron ore was contradicted by the company’s coal-output expansion. “We believe in free markets. We believe in being the lowest cost producer.”

Glasenberg, a 57-year-old accountant turned coal trader, last year doubled down on the power-station fuel, betting on rising world demand as he completed the $29 billion takeover of Xstrata Ltd. That gave Glencore an interest in more than 35 coal mines in Colombia, Africa and Australia.

Still, Glasenberg has also shuttered mines in a bid to partly offset the impact of new production, said Bernstein’s Gait. The company last month suspended operations at Ravensworth in Australia, citing lower prices and higher costs.

Better Job

“We have seen Glencore close thermal coal mines and cut thermal coal capacity so to Glencore’s defense, I would say that they’ve done a better job of it,” said Gait.

Four months after completing the Xstrata takeover, Glencore told investors last September that about 30 percent of seaborne coal was being sold at a loss. That’s increased to more than 40 percent, Macquarie Group Ltd. said in a September presentation.

That’s hurting Glencore’s bottom line. Adjusted earnings before interest and tax from its energy products marketing unit, which includes coal trading, fell 55 percent in the first half from a year earlier.

Stabilizing Market

The price of energy coal from Australia’s Newcastle Port, a benchmark for Asia, has plunged about 25 percent this year to $63.30 a ton last week, the lowest since 2009, according to data from McCloskey.

“We believe the spot thermal coal price could test the $60 a ton level over the next three to six months,” Deutsche Bank AG analysts including Grant Sporre wrote in an Oct. 10 note. A drop below $60 a ton “would catalyze the much needed production shuts to stabilize the market.”

With freight contracts at some mines in Australia, the second-biggest exporter of energy coal, making it cheaper to ship at a loss rather than close, producers are helping to prolong a supply glut.

Glencore plans to increase output in Australia by about 10 million tons between 2015 and 2018, more than any of its rivals, according to a presentation last month by Macquarie analyst Stefan Ljubisavljevic. BHP and Rio don’t figure in the bank’s analysis of new Australian supply.

Glencore Production

Glencore estimates its production, including coking coal, will climb to 168 million tons this year, according to a presentation to analysts visiting their Australian coal mines last month posted on its website. That’s up from 157 million tons last year.

While output from its mines in South Africa and Colombia is set to fall this year, production in Australia is estimated to rise 16 percent this year to 94 million tons at operations acquired from Xstrata. The company sees thermal coal demand growth at 5 percent a year and a slowing of supply growth, it said. It predicts a deficit in global production next year.

Still, the company’s spending on expanding mines in Australia, South Africa and Colombia in the first half of this year dropped to $420 million, it said in August, less than half the $919 million invested a year earlier. Glencore spent $2.5 billion in 2012 and $1.66 billion last year, largely on mines inherited through the acquisition of Xstrata.

‘Supply-Demand Fundamentals’

“Ivan is an incredibly bright guy, very smart, who when he says something, as he’s been talking about with the iron ore market, there’s a very specific reasoning behind it,” said Clive Burstow, an investment manager who helps oversee about $800 million at Barings Asset Management. “The supply-demand fundamentals for coal are much more supportive of a longer term upward tick in coal prices. In the iron ore market, I’d argue you’ve got probably a bit more pain you need to take.”

Like Rio and BHP in iron ore, Glencore says it’s best positioned to weather the coal-price drop given its low costs. Still, Glasenberg has at least shelved some developments, according to Ben Davis, an analyst at Liberum Capital Ltd. in London who has a hold recommendation on the company’s stock.

“While Glencore is undoubtedly contributing to continued weakness in thermal coal prices by bringing on new supply, those projects were already in progress and they’ve delayed others that were in earlier stages,” said Davis. “BHP and Rio are guilty of bringing on destructive new supply whereas Glencore expected to meet demand.”

To contact the reporter on this story: Jesse Riseborough in London at [e-mail] To contact the editors responsible for this story: Will Kennedy at [e-mail] Dylan Griffiths, Will Wade